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Traders Join Economists in First-Half Rate Cut: Poland Credit

Narodowy Bank Polski Governor Marek Belka
Marek Belka, governor of Poland's central bank. Photographer: John Guillemin/Bloomberg

Nov. 9 (Bloomberg) -- Polish bond investors are starting to anticipate that policy makers will follow the European Central Bank in cutting interest rates as economists forecast lower borrowing costs in the first half of next year.

Two-year bond yields fell as much as 10 basis points to 4.58 percent from a three-month high in the past two weeks, widening the discount to 10-year notes to 114 basis points from as little as 106, data compiled by Bloomberg show. Six-month forward-rate agreements, a gauge of expectations for borrowing costs, fell to 26 basis points below the three-month Warsaw Interbank Offered Rate today, the biggest discount in two months, and down from a premium of 92 basis points in January.

While all 32 economists surveyed by Bloomberg correctly predicted Narodowy Bank Polski Governor Marek Belka would keep rates at 4.5 percent today, they expect a cut to 4.25 percent in the first quarter as economic growth slows and the zloty rebounds from the world’s worst performance against the euro and dollar in the third quarter. The decline in two-year yields cut the premium over benchmark German bunds to 416 basis points yesterday, or 4.16 percentage point, from a one-year high of 423 on Nov. 1.

“The central bank will reduce interest rates as early as the first quarter,” Michal Dybula, a Warsaw-based economist at BNP Paribas SA, said yesterday in a phone interview. “If on top of the ECB easing they see the economy slowing and inflation coming off, what other argument will they need to cut rates?”

The ECB lowered its benchmark interest rate by 25 basis points to 1.25 percent last week as Mario Draghi, chairing his first meeting since succeeding Jean-Claude Trichet on Nov. 1, confounded 51 of 55 economists in a Bloomberg survey and warned the euro area is heading toward a “mild recession.”

Slowing Growth

While the International Monetary Fund expects Poland’s economy to expand 3 percent next year, faster than the 1.1 percent pace for the euro area and the Hungary’s 1.7 percent rate, the expansion would be slower than the 4 percent forecast by Prime Minister Donald Tusk’s government.

“We are focusing a lot right now on the lower growth prospects for the region and how the lower growth in the EU and Germany will affect Hungary and Poland,” Jens Thellesen, who helps manage about $1.2 billion in emerging-market debt at Jyske Invest in Silkeborg, Denmark, said by phone Nov. 4.

Poland has kept its rate at a two-year high since June as the zloty tumbled 10 percent against the euro in the third quarter. The zloty has recovered since, rallying 2.9 percent from a two-year low on Sept. 22. The currency weakened 0.9 percent to 4.3972 per euro at 1:09 p.m. in Warsaw.

Default Swaps

The extra yield investors demand to hold Poland’s dollar-denominated bonds rather than U.S. Treasuries rose six basis points to 269 yesterday, indexes compiled by JPMorgan Chase & Co. show. The spread over German euro-denominated bonds rose 13 basis points to 405. The difference is down from 443 basis points on Sept. 22, according to data compiled by Bloomberg.

The cost to insure against non-payment on Polish debt for five years using credit-default swaps fell two basis points to 243, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Polish default swaps cost 58 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index, compared with an 77 basis-point discount a year ago. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

‘Minor Influence’

Polish policy makers are unlikely to follow the ECB to cut rates because a wider interest-rate differential will help support the zloty, Peter Attard Montalto, a London-based economist at Nomura Holdings Inc., wrote in a research report on Nov 4.

“We do not believe there is a strong link and ECB actions seem to have only a minor influence on MPC thinking,” Montalto said. “MPC member rhetoric since the last meeting also suggests their thinking has not changed and they expect rates to remain on hold for some time.”

Rates may remain unchanged in the coming quarters in Poland as weaker economic growth slows price increases, the central bank’s rate-setting Monetary Policy Council said, according to the minutes of its Oct. 4-5 meeting.

Consumer-price growth reached 5 percent in May, the highest in almost 10 years, before easing to 3.9 percent in September. The central bank’s inflation target is 2.5 percent.

Romanian Surprise

Romania unexpectedly cut its main interest rate to a record-low 6 percent from 6.25 percent on Nov. 2. The Czech central bank left its benchmark two-week repurchase rate at a record-low 0.75 percent the following day, below the ECB’s main rate. Russia has kept its benchmark refinancing rate at 8.25 percent since May.

“What we’ve seen over the last couple of days, especially after the ECB meeting, is the front end being re-priced” in the bond market, Mihail Bozinov, a strategist at Morgan Stanley in London, said by phone Nov. 4. “The Polish curve can steepen a bit more.”

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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